NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2021 and 2020
NOTE
1 - DESCRIPTION OF BUSINESS
Nature
of Business
Vystar
Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester,
Massachusetts and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light.
Vystar is also the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”).
Vystar manufactures and sells NRL used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida
Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S.
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
Other than those events disclosed in Note 18, the Company is not aware of any other significant events that occurred subsequent to the
balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Reclassifications
Loss
on impairment balance from the 2020 consolidated
financial statements has been reclassified to conform to the 2021 financial statement presentation. Previously included in
other income (expense), loss on impairment is included in operating expenses for 2021 and 2020. Such reclassification had no effect
on the previously reported net loss for the year ended December 31, 2020.
COVID-19
In
December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization
declared COVID-19 a pandemic resulting in federal, state, and local governments mandating various restrictions, including travel restrictions,
restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus.
On March 24, 2020, Massachusetts required all non-essential businesses to close their physical workplaces. As a result, the Rotmans showroom,
offices and warehouse temporarily closed. During that time, associates worked remotely where possible. The Company reopened on June 10,
2020 and continues to monitor developments, including government requirements and recommendations.
The
COVID-19 pandemic has caused, among other things, interruptions to our supply chains and suppliers, including problems with inventory
availability with price volatility and higher cost of products and international freight due to the high demand of products and low supply
for an unpredictable period of time.
The
pandemic continues to cause economic disruption. Although our showroom has reopened, some business segments remain closed or are operating
on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with the emergence and spread of variants. We cannot reasonably
estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions made as of December 31, 2021 could
change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects
cannot be measured at this time).
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the
Company’s operations and manage its business as one reportable segment with different operating segments.
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying disclosures. Significant estimates made by management include, among others,
allowance for obsolete inventory, the recoverability of long-lived assets, valuation and impairment of intangible assets, fair values
of right of use assets and lease liabilities, valuation of derivative liabilities, share-based compensation and other equity issuances.
Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the
future, actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts payable,
accrued expenses and interest payable, shareholder notes payable, long-term debt and unearned revenue. The carrying values of all the
Company’s financial instruments approximate or equal fair value because of their short maturities and market interest rates or,
in the case of equity securities, being stated at fair value.
In
specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date in the Company’s principal market for such transactions. If there is not an established principal market, fair value is derived
from the most advantageous market.
Valuation
inputs are classified in the following hierarchy:
|
● |
Level
1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
|
● |
Level
2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs. |
|
● |
Level
3 inputs are unobservable inputs for the asset or liability. |
Highest
priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach,
income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized
at fair value on a recurring basis through the date of the settlement and December 31, 2021 and are level 3 measurements. There have
been no transfers between levels during the year ended December 31, 2021.
Acquisitions
Amounts
paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of
acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by
management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including,
legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in
which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition
date.
Cash,
Cash Equivalents and Restricted Cash
Cash
and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also
include amounts due from third-party financial institutions for credit and debit card transactions which typically settle within five
days. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other on the
consolidated balance sheets.
Accounts
Receivable, Net
Accounts
receivable, net are stated at the amount management expects to collect from outstanding balances. The Company routinely sells,
without recourse, trade receivables resulting from retail furniture sales to two financial institutions at an average service charge
of 1.3%
in 2021. Amounts sold during the year ending December 31, 2021 were approximately $5,603,000.
Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against
debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the
Company grants credit to Vystar customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in
these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge
to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts.
Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to
the allowance and a credit to accounts receivable. As of December 31, 2021, the Company has recorded an allowance for doubtful accounts
of $273,000.
Before 2021, the Company considered accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.
Other
Receivables
Under
the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020
and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain
criteria. The Company recognized employee retention credits of $771,287
during the year ended December 31, 2021 which
has been included in other income, net in the consolidated statements of operations. The Company has filed for refunds of the employee
retention credits and as of the date of this Annual Report on Form 10-K has subsequently received $154,468
and estimates receiving the remaining
refunds by the end of 2022.
Rotmans
terminated its agreement with a supplier in 2021 and will receive $100,000 in consideration. As of December 31, 2021, the remaining account
balance of $104,075 represents funds due from this termination.
Inventories
Inventories
include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture, mattresses,
RxAir purifier units, foam toppers and pillows and are carried at net realizable value, which is defined as selling price less cost of
completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate
consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected to
be sold within 12 months are classified as long-term.
Prepaid
Expenses and Other
Prepaid
expenses and other include restricted cash, amounts related to prepaid insurance policies, which are expensed on a straight-line basis
over the life of the underlying policy, and other expenses.
Investments
- Equity Securities
Marketable
equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses
are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other than temporary
declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets,
generally 5 to 10 years, using straight-line and accelerated methods.
Expenditures
for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items
are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively,
and the resultant gain or loss is reflected in earnings. As of December 31, 2021, the net balance of property and equipment is $832,099
with accumulated depreciation of $643,984. As of December 31, 2020, the net balance of property and equipment is $1,631,651 with accumulated
depreciation of $587,081.
Intangible
Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United States
Patent and Trade Office (“USPTO”), as well as five issued international Patent Cooperation Treaty (“PCT”) patents.
Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from
9 to 20 years.
The
Company has trademark protection for “Vystar”, “Vytex”, and “RxAir” among others. Trademarks are
carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated annually
for impairment.
Customer
relationships, tradename and marketing related intangibles are carried at cost and are being amortized on a straight-line basis over
their estimated useful lives, typically ranging from 5 to 10 years.
Our
intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances. During
the year ended December 31, 2021, we recognized an impairment charge of $245,050 related to the proprietary technology and customer relationships
involving NHS. During the year ended December 31, 2020, we recognized an impairment charge of $240,350 related to our tradename and brand
due to the discontinuation of the NHS tradename.
Long-Lived
Assets
We
review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may
not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the
carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment
is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately
presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are
no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the
appropriate asset and liability sections of the consolidated balance sheet, if material.
Goodwill
Goodwill
reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not amortized,
rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual impairment test
at the end of each calendar year, or more frequently if events or changes in circumstances indicate the asset might be impaired.
Accounting
for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date
fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date
fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions to accurately value assets
acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
The
impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate the
recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income approach
using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches, a conclusion
of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair value of a reporting
unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment losses, limited to the carrying
value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value. We did not recognize any impairment
of our goodwill during the years ended December 31, 2021 and 2020.
Convertible
Notes Payable
Borrowings
are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference between
the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of operations over
the period of the borrowings using the effective interest method.
Derivatives
The
Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”) Topic
815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could
be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet
date and recorded as a liability. In the event the fair value is recorded as a liability, the change in fair value is recorded in the
statements of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is
marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially
classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair
value of the instrument on the reclassification date.
The
Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded
feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features
that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s
own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion
features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting
purposes. Accordingly, as of December 31, 2021, the Company has classified all conversion features as derivative liabilities and has
estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.
Unearned
Revenue
Unearned
revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured
stain protection warranty coverage.
Changes
to unearned revenue during the years ended December 31, 2021 and 2020 are summarized as follows:
SCHEDULE OF UNEARNED REVENUE
| |
2021 | | |
2020 | |
| |
| | |
| |
Balance, beginning of the year | |
$ | 2,427,771 | | |
$ | 2,500,572 | |
| |
| | | |
| | |
Customer deposits received | |
| 24,522,061 | | |
| 19,080,557 | |
| |
| | | |
| | |
Warranty coverage purchased | |
| - | | |
| 118,151 | |
| |
| | | |
| | |
Gift cards purchased | |
| 15,860 | | |
| 10,225 | |
| |
| | | |
| | |
Revenue earned | |
| (25,843,497 | ) | |
| (19,281,734 | ) |
| |
| | | |
| | |
Balance, end of the year | |
$ | 1,122,195 | | |
$ | 2,427,771 | |
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss for 2021 and 2020, common stock equivalents,
including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were
the same. Excluded from the computation of diluted loss per share were options to purchase 26,874,938 and 27,124,938 shares of common
stock for 2021 and 2020, respectively, as their effect would be anti-dilutive. Warrants to purchase 10,174,259 and 14,205,912 shares
of common stock for 2021 and 2020, respectively, were also excluded from the computation of diluted loss per share as their effect would
be anti-dilutive. In addition, preferred stock convertible to 3,230,220 and 4,801,840 shares of common stock for 2021 and 2020, respectively,
were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. Both shareholder and Rotman Family
contingently convertible notes payable convertible to 764,790,568 and 198,441,652 shares of common stock for 2021 and 2020, respectively,
were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
Our
principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a
contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on
either the acceptance of standard terms and conditions at the retail store and on the websites for e-commerce customers, or the execution
of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and
other contractual terms and conditions of the sale.
Consideration
is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within
1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s
historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.
A
performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished
goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to
the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods
is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and
handling are accounted for as the single performance obligation.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer
receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be
entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers,
upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach
of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For
retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are
shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially
different from the estimates. As of December 31, 2021, and 2020, reserves for estimated sales returns totaled $337,000 and $55,000, respectively,
and are included in the accompanying consolidated balance sheets as accrued expenses.
We
recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product
is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping
through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the
accompanying consolidated statements of operations and the costs associated with these deliveries are included in operating expenses
in the accompanying consolidated statements of operations through January 20, 2020. All subsequent delivery costs are included in revenues
as a third-party delivery service was engaged beginning January 21, 2020. Taxes assessed by a governmental authority that are both imposed
on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted
for as a fulfillment cost and are included in cost of revenue in the accompanying consolidated statements of operations.
The
Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue
is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms
primarily range from three to five years from the date of delivery. The Company ended this warranty program during 2020 but continues
to amortize the previously contracted warranties over their original terms. The Company switched to a separately-priced stain protection
warranty serviced by a third-party when the store reopened in June 2020. At December 31, 2021, and 2020, deferred warranty revenue was
approximately $524,000 and $920,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets.
During 2021, the Company recognized total revenues of approximately $388,000 related to deferred warranty revenue arrangements. During
2020, the Company recorded total proceeds of approximately $118,000 and recognized total revenues of approximately $506,000 related to
deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense
on a straight-line basis over the period of the warranty contract. At December 31, 2021, and 2020, deferred commission costs were approximately
$134,000 and $241,000, respectively, and are included in the accompanying consolidated balance sheets. All other costs, such as costs
of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research
and Development
Research
and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research,
development and testing. For the years ended December 31, 2021 and 2020, Vystar’s research and development costs were not significant.
Advertising
Costs
Advertising
costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising
costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $2,174,000
and $1,808,000 for the years ended December 31, 2021 and 2020, respectively.
Share-Based
Compensation
The
fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions.
Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified method described
in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of restricted stock awards is
determined using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they
occur. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.
Income
Taxes
Vystar
recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position
is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected
in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not
(i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities.
Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount
of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if
all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax
positions are recorded as interest expense. No such interest or penalties have been incurred for the years ended December 31, 2021 and
2020.
The
Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2018 through 2021.
Concentration
of Credit Risk
Certain
financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily
of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance
limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate,
these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack
of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions
in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to
the sales.
Other
Risks and Uncertainties
The
Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers
and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.
Recent
Accounting Pronouncements
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s
accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective
for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption
is permitted. The Company is evaluating the effects, if any, of the adoption of ASU 2021-04 guidance on the Company’s financial
position, results of operations and cash flows.
In
August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash
conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own
equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies
how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation.
The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible
to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including
interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15,
2020, including interim periods within those fiscal years. The FASB also specified that an entity should adopt the guidance as of the
beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating
the effect the adoption will have on its financial statements.
In December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part as part of its overall simplification initiative to reduce
costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users
of financial statements. ASU 02019-12 removes certain exceptions to the general principle of ASC 740 in order to reduce the cost and
complexity of its application. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December
15, 2020, and interim periods within those reporting periods. The Company adopted ASC 740 in 2021 with no material impact
on its financial statements.
NOTE 3 - LIQUIDITY AND GOING CONCERN
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
However, the Company has incurred significant losses and experienced negative cash flow since inception. At December 31, 2021, the Company
had cash of $151,175 and a deficit in working capital of approximately $8.3 million. Further, at December 31, 2021 the accumulated deficit
amounted to approximately $51.4 million. We use working capital to finance our ongoing operations, and since those operations do not
currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this
history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
A
successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s
planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance
future operations using cash on hand, increased revenue from RxAir air purification units,Vytex license fees, proceeds received from
the second round of financing under the Paycheck Protection Program and stock issuances to new and existing shareholders. The Company
has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture
business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.
There
can be no assurances the Company will be able to achieve projected levels of revenue in 2022 and beyond. If the Company is not able to
achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail
or reorient operations during 2022, which could have a material adverse effect on the ability to achieve the business objectives, and
as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary
should the Company be forced to take any such actions.
The
Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air
purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products,
services and competing technological developments; the Company’s ability to successfully realize synergies through the integration
of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail
furniture business; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands
its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company
has achieved sustained revenue generation.
NOTE 4 - INVESTMENTS – EQUITY SECURITIES
Cost
and fair value of investments - equity securities are as follows:
SCHEDULE OF COST AND FAIR VALUE OF INVESTMENTS
| | |
| | |
Gross | | |
Gross | | |
Fair | |
| | |
Cost | | |
Unrealized Losses | | |
Unrealized Gains | | |
Value | |
December 31, 2020 | | |
$ | 141,225 | | |
$ | (13,315 | ) | |
$ | - | | |
$ | 127,910 | |
Investments,
which represented equity securities in a publicly traded company, were sold during 2021 at a gain of approximately $16,000 which
is included in other income (expense). Unrealized holding (gains) losses on available-for-sale securities were approximately ($20,000)
and $13,000 in 2021
and 2020, respectively, and have been included in other income (expense) in the accompanying statements of operations. The
Company recognized a loss of approximately $4,000 upon liquidation of the investments.
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net consists of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| |
2021 | | |
2020 | |
| |
| | |
| |
Furniture, fixtures and equipment | |
$ | 588,624 | | |
$ | 1,385,430 | |
Tooling and testing equipment | |
| 338,572 | | |
| 338,572 | |
Parking lots | |
| 365,707 | | |
| 365,707 | |
Leasehold improvements | |
| 134,014 | | |
| 79,857 | |
Motor vehicles | |
| 49,166 | | |
| 49,166 | |
| |
| | | |
| | |
Property and equipment, gross | |
| 1,476,083 | | |
| 2,218,732 | |
Accumulated depreciation | |
| (643,984 | ) | |
| (587,081 | ) |
| |
| | | |
| | |
Property and equipment, net | |
$ | 832,099 | | |
$ | 1,631,651 | |
Depreciation
expense for the years ended December 31, 2021 and 2020 was $353,833 and $378,282, respectively.
NOTE 6 - INTANGIBLE ASSETS
Intangible
assets consist of the following:
SCHEDULE OF INTANGIBLE ASSETS
| |
| | |
| | |
Amortization | |
| |
| | |
| | |
Period | |
| |
2021 | | |
2020 | | |
(in Years) | |
Amortized intangible assets: | |
| | | |
| | | |
| | |
Customer relationships | |
$ | 150,000 | | |
$ | 210,000 | | |
| 6
- 10 | |
Proprietary technology | |
| 280,000 | | |
| 610,000 | | |
| 10 | |
Tradename and brand | |
| 1,050,000 | | |
| 1,050,000 | | |
| 5 - 10 | |
Marketing related | |
| 380,000 | | |
| 380,000 | | |
| 5 | |
Patents | |
| 361,284 | | |
| 359,101 | | |
| 6
- 20 | |
Noncompete | |
| 50,000 | | |
| 50,000 | | |
| 5 | |
| |
| | | |
| | | |
| | |
Total | |
| 2,271,284 | | |
| 2,659,101 | | |
| | |
Accumulated amortization | |
| (1,071,486 | ) | |
| (832,186 | ) | |
| | |
| |
| | | |
| | | |
| | |
Intangible assets, net | |
| 1,199,798 | | |
| 1,826,915 | | |
| | |
Indefinite-lived intangible assets: | |
| | | |
| | | |
| | |
Trademarks | |
| 9,072 | | |
| 9,072 | | |
| | |
| |
| | | |
| | | |
| | |
Total intangible assets | |
$ | 1,208,870 | | |
$ | 1,835,987 | | |
| | |
Amortization
expense for the years ended December 31, 2021 and 2020 was $384,250 and $416,959, respectively. During the year ended December 31, 2021,
we recognized an impairment charge of $245,050 related to customer relationships and proprietary technology acquired from NHS. During
the year ended December 31, 2020, we recognized an impairment charge of $240,350 related to our tradename and brand due to the discontinuance
of the NHS tradename.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE
| |
Amount | |
| |
| |
2022 | |
$ | 345,249 | |
2023 | |
| 338,638 | |
2024 | |
| 239,411 | |
2025 | |
| 90,550 | |
2026 | |
| 71,232 | |
Thereafter | |
| 114,718 | |
Total | |
$ | 1,199,798 | |
NOTE 7 - LEASES
The
Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with options
to extend to 2031. In September 2021, the Company entered into a lease termination agreement involving one of its warehouses effective
September 30, 2021. Included in other income (expense), net is a gain on the derecognition of the lease of approximately $5,000.
The
table below presents the lease costs for years ended December 31, 2021 and 2020:
SCHEDULE OF LEASE COST
| |
| 1 | | |
| 2 | |
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Operating lease cost | |
$ | 1,479,444 | | |
$ | 1,579,919 | |
| |
| | | |
| | |
Finance lease cost: | |
| | | |
| | |
| |
| | | |
| | |
Amortization of right-of-use assets | |
| 182,204 | | |
| 188,047 | |
Interest on lease liabilities | |
| 34,601 | | |
| 43,454 | |
| |
| | | |
| | |
Total lease cost | |
$ | 1,696,249 | | |
$ | 1,811,420 | |
During
the year ended December 31, 2021, the Company recognized sublease income of approximately $145,000, which in included in other income
(expense), net in the accompanying consolidated statements of operations. During the year ended December 31, 2020, the Company recognized
sublease income of approximately $112,000, which in included in other income (expense), net in the accompanying consolidated statements
of operations.
Our
leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring
operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement
to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates
as of the implementation date for operating leases that commenced prior to that date.
The
following table presents other information related to leases:
SCHEDULE OF OTHER INFORMATION RELATED TO LEASES
| |
| 1 | | |
| 2 | |
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
| |
| | | |
| | |
Operating cash flows used for operating leases | |
$ | 1,394,135 | | |
$ | 1,500,616 | |
Financing cash flows used for financing leases | |
| 231,414 | | |
| 214,308 | |
| |
| | | |
| | |
Assets obtained in exchange for operating lease liabilities | |
| - | | |
| - | |
| |
| | | |
| | |
Assets obtained in exchange for finance lease liabilities | |
| 24,603 | | |
| 75,739 | |
| |
| | | |
| | |
Weighted average remaining lease term: | |
| | | |
| | |
Operating leases | |
| 8.9 years | | |
| 8.9 years | |
Finance leases | |
| 4.3 years | | |
| 5 years | |
| |
| | | |
| | |
Weighted average discount rate: | |
| | | |
| | |
Operating leases | |
| 5.59 | % | |
| 5.55 | % |
Finance leases | |
| 5.16 | % | |
| 5.16 | % |
The
future minimum lease payments required under operating and financing lease obligations as of December 31, 2021 having initial or remaining
non-cancelable lease terms in excess of one year are summarized as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS REQUIRED UNDER OPERATING AND FINANCING LEASE OBLIGATIONS
| |
Operating Leases | | |
Finance Leases | | |
Total | |
| |
| | |
| | |
| |
2022 | |
$ | 969,427 | | |
$ | 160,692 | | |
$ | 1,130,119 | |
2023 | |
| 878,807 | | |
| 139,080 | | |
| 1,017,887 | |
2024 | |
| 870,000 | | |
| 139,080 | | |
| 1,009,080 | |
2025 | |
| 870,000 | | |
| 139,080 | | |
| 1,009,080 | |
2026 | |
| 870,000 | | |
| 68,395 | | |
| 938,395 | |
Thereafter | |
| 3,552,500 | | |
| - | | |
| 3,552,500 | |
| |
| | | |
| | | |
| | |
Total undiscounted lease liabilities | |
| 8,010,734 | | |
| 646,327 | | |
| 8,657,061 | |
Less: imputed interest | |
| (1,692,998 | ) | |
| (68,445 | ) | |
| (1,761,443 | ) |
| |
| | | |
| | | |
| | |
Net lease liabilities | |
$ | 6,317,736 | | |
$ | 577,882 | | |
$ | 6,895,618 | |
As
of December 31, 2021, the Company does not have additional operating and finance leases that have not yet commenced.
NOTE 8 - NOTES PAYABLE AND LOAN FACILITY
Letter
of Credit
The
Company entered into a $125,000 letter of credit agreement with Fidelity Co-operative Bank in November 2020. The pledged collateral of
a $125,000 cash deposit account is included in prepaid expenses and other. The letter of credit was required pursuant to an agreement
with a third-party financial institution for customer financing.
Advances
On
May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement,
Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company
funds of approximately $2,300,000 to pay off the Fidelity line of credit and certain other vendors. The agent will be reimbursed for
the advance from the proceeds of the sale. The initial sales agreement with the agent ended in May 2021. A new agreement was entered
into with the agent in June 2021. The remaining inventories on hand were used to pay off the liability of the first sale and then simultaneously
purchased back for the next sale. The agreement has been amended numerous times and is scheduled to end in August 2022. The agent has
a senior first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are
satisfied. The outstanding balance of the advance is approximately $2,082,000 and $2,159,000 as of December 31, 2021 and 2020, respectively,
and is included in accounts payable in the accompanying consolidated balance sheet.
Term
Notes
On
February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts
totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts were to be delivered weekly to Libertas
at predetermined amounts over a period of nine months. Pursuant to a settlement agreement dated August 25, 2020, the amount owed to Libertas
has been fully settled with the payment of $525,000 on September 4, 2020. Included in gain (loss) on settlement of debt, net in the accompanying
statements of operations for the year ended December 31, 2020 is a gain of approximately $44,000 realized on the Libertas settlement.
On
April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established
pursuant to the CARES Act and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP
Loan”) is evidenced by a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of
$ with United Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues
on the outstanding principal at the rate of % per annum. The term of the Note is two years, though it may be payable sooner in connection
with an event of default under the Note. On January 24, 2021, the PPP loan was fully forgiven by the SBA.
On
February 2, 2021, Rotmans received a second PPP loan of $1,402,900 from the SBA. The terms of the Note are the same of the original PPP
loan. On June 25, 2021, the PPP loan was fully forgiven by the SBA. Included in gain (loss) on settlement of debt, net for the year ended
December 31, 2021 is $2,805,800 related to the forgiveness of both PPP loans.
Certain
investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit, the proceeds
of which were loaned to the Company. Since the inception of the loan, the Company has paid interest at a rate of 4.5% per annum to Ameris
Bank on behalf of the investors. Concurrently, interest payable to the investors has accrued at a rate of 10% per annum. Pursuant to
an agreement dated September 3, 2020, the balance of $500,000 plus accrued interest of $160,000 was deemed to be paid in full through
the issuance of 41,250,000 shares of the Company’s common stock. Included in gain (loss) on settlement of debt, net for the year
ended December 31, 2020 is a loss of approximately $1,114,000 realized on the Ameris settlement.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The
following table summarizes shareholder, convertible and contingently convertible notes payable:
SCHEDULE OF LONG-TERM DEBT
| |
| 1 | | |
| 2 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Shareholder, convertible and contingently convertible notes | |
$ | 1,241,895 | | |
$ | 951,895 | |
Accrued interest | |
| 147,009 | | |
| 94,164 | |
| |
| | | |
| | |
Total shareholder notes and accrued interest | |
| 1,388,904 | | |
| 1,046,059 | |
| |
| | | |
| | |
Less: current maturities | |
| (1,388,904 | ) | |
| (1,046,059 | ) |
| |
| | | |
| | |
Total long-term debt | |
$ | - | | |
$ | - | |
Shareholder
Convertible Notes Payable
During
the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable, some of which were for contract
work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $338,000. The notes are (i)
unsecured, (ii) bear interest at an annual rate of five percent (5%) from date of issuance, and (iii) are convertible at the Company’s
option post April 19, 2018. The notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted,
the notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average
closing price with a 50% discount. The outstanding balance of all of these notes of as December 31, 2021 and 2020 is $338,195. The notes
matured in January 2020 and continue to accrue interest until settlement. They are in default as of December 31, 2021. The unpaid balance
on the notes bears interest at an annual rate of eight percent (8%) in arrears.
During
the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest
at an annual rate of five percent (5%). The notes mature one year from issuance but may be extended one (1) additional year by the Company.
The face amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing
price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration
event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. All of
these notes are outstanding and in default as of December 31, 2021. The unpaid balance on the notes bears interest at an annual rate
of eight percent (8%) in arrears.
During
the year ended December 31, 2021, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $290,000. The notes are unsecured and bear interest at an annual rate of five percent (5%) from date of issuance.
The face amount of the notes represents the amount due at maturity along with the accrued interest. In the event that the spin-off of
RxAir does not occur within 2022, the Company will convert these notes into common stock at a conversion price of $0.016. If the spin-off
does occur, these notes will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion
price of $0.18. All of these notes are outstanding as of December 31, 2021. At the issuance date of these notes, it was determined they
contain a beneficial conversion feature amounting to approximately $90,000. As these notes are contingently convertible, the beneficial
conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs.
Based
on the variable conversion price of the notes issued prior to 2021, the Company recorded the embedded conversion features as derivative
liabilities, which amounted to $647,100 and $491,700 at December 31, 2021 and 2020, respectively.
Related
Party Debt
The
following table summarizes related party debt:
SCHEDULE OF RELATED PARTY DEBT
| |
| 1 | | |
| 2 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Rotman Family convertible notes | |
$ | 1,967,737 | | |
$ | 1,832,707 | |
Rotman Family nonconvertible notes | |
| 1,953,509 | | |
| 1,555,500 | |
Accrued interest | |
| 384,238 | | |
| 189,394 | |
Debt discount | |
| (27,083 | ) | |
| (4,667 | ) |
| |
| | | |
| | |
Long term debt, current | |
| 4,278,401 | | |
| 3,572,934 | |
Less: current maturities | |
| (1,487,000 | ) | |
| (1,537,000 | ) |
| |
| | | |
| | |
Long term debt | |
$ | 2,791,401 | | |
$ | 2,035,934 | |
Rotman
Family Convertible Notes
On
September 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000 to Steven Rotman ($105,000) and Greg
Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) from date of issuance, (iii)
are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes
plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices
in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and
Greg Rotman is approximately $126,000 and $66,000, respectively, at December 31, 2021 and approximately $118,000 and $62,000, respectively,
at December 31, 2020.
On
July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500 to Steven Rotman ($1,102,500) and Bernard Rotman
($420,000) as partial consideration for the acquisition of 58% of Rotmans. These notes are (i) unsecured, and (ii) bear interest at an
annual rate of five percent (5%) from date of issuance. These notes can be converted only after an acceleration event which involves
a symbol change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight
years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are
convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The balance of the notes
payable including accrued interest to Steven and Bernard Rotman were approximately $1,238,000 and $472,000, respectively, at December
31, 2021 and approximately $1,183,000 and $451,000, respectively, at December 31, 2020.
On
December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000 to Steven Rotman. The face amount
of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the
Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion
and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse
stock split and such conversion is in the control of the Company. The note was extended to mature two years from issuance. The balance
of the note payable including accrued interest to Steven Rotman is approximately $110,000 and $105,000 at December 31, 2021 and 2020,
respectively.
On
February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000 to Steven Rotman. The face amount of
the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the
Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion
and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse
stock split and such conversion is in the control of the Company. The note matures two years from issuance. The balance of the note payable
including accrued interest to Steven Rotman is approximately $55,000 and $52,000, at December 31, 2021 and 2020, respectively.
On
June 3, 2021, the Company issued a contingently convertible promissory note totaling $130,030 to Gregory Rotman. The face amount of the
note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s
stock, at the holder’s option, based on the average closing price for the trailing 20 days prior to conversion and carrying 50%
discount or $0.165 per share whichever is lower. The holder may elect to accelerate conversion in the event of a spin-out or reverse
split. The note matures two years from issuance. The balance of the note payable including accrued interest to Gregory Rotman is approximately
$134,000 at December 31, 2021.
On
August 17, 2021, the Company issued a contingently convertible promissory note totaling $5,000 to Jamie Rotman. The note is unsecured
and bears interest at an annual rate of five percent (5%) from date of issuance. The face amount of the note represents the amount due
at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within one year, the Company will
convert the note into common stock at a conversion price of $0.016. If the spin-off does occur, the note will convert into RxAir common
stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. At the issuance date of this
note, it was determined to contain a beneficial conversion feature amounting to approximately $2,000. As this note is contingently convertible,
the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs. The
balance of the note payable including accrued interest to Jamie Rotman is aprroximately $5,000 at December 31, 2021.
The
following table summarizes the Rotman Family Convertible Notes:
SCHEDULE OF NOTES PAYABLE
| |
| |
| | | |
| Carrying Amount | | |
| | |
| |
| |
| Principal | | |
| December 31, | | |
| December 31, | |
| |
Issue Date | |
| Amount | | |
| 2021 | | |
| 2020 | |
Steven Rotman 8.00% note due July 2024 | |
07/18/19 | |
$ | 105,000 | | |
$ | 126,000 | | |
$ | 117,600 | |
Steven Rotman 8.00% note due July 2024 | |
07/18/19 | |
$ | 105,000 | | |
$ | 126,000 | | |
$ | 117,600 | |
Gregory Rotman 8.00% note due July 2024 | |
07/18/19 | |
| 55,207 | | |
| 66,264 | | |
| 61,847 | |
Steven Rotman 5.00% note due July 2027 | |
07/18/19 | |
| 1,102,500 | | |
| 1,238,016 | | |
| 1,182,890 | |
Bernard Rotman 5.00% note due July 2023 | |
07/18/19 | |
| 420,000 | | |
| 471,625 | | |
| 450,625 | |
Steven Rotman 5.00% note due December 2021 | |
12/19/19 | |
| 100,000 | | |
| 110,208 | | |
| 105,207 | |
Steven Rotman 5.00% note due February 2022 | |
02/02/20 | |
| 50,000 | | |
| 54,583 | | |
| 52,083 | |
Gregory Rotman 5.00% note due June 2023 | |
06/03/21 | |
| 130,030 | | |
| 133,822 | | |
| - | |
Jamie Rotman 5.00% note due August 2022 | |
08/17/21 | |
| 5,000 | | |
| 5,094 | | |
| - | |
| |
| |
| | | |
| | | |
| | |
| |
| |
$ | 1,967,737 | | |
| 2,205,612 | | |
| 1,970,252 | |
| |
| |
| | | |
| | | |
| | |
Debt Discount | |
| |
| | | |
| (27,083 | ) | |
| (4,667 | ) |
| |
| |
| | | |
| | | |
| | |
| |
| |
| | | |
$ | 2,178,529 | | |
$ | 1,965,585 | |
Based
on the variable conversion price for all of these convertible notes, the Company recorded the embedded conversion features as derivative
liabilities, which amounted to $1,131,000 and $1,275,000 at December 31, 2021 and 2020, respectively.
Rotman
Family Nonconvertible Notes
In
connection with the acquisition of 58% of Rotmans, Steven and Bernard Rotman were issued related party notes payable in the amounts of
$367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures
eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and
Bernard Rotman, respectively, per month were scheduled to begin six months from issuance until maturity in December 2027 and 2023, respectively.
The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately $413,000 and $157,000, respectively,
at December 31, 2021 and approximately $394,000 and $150,000, respectively, at December 31, 2020. No payments have been made by the Company
as of December 31, 2021.
During
the six months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $1,048,000. In December 2020, the Company formalized
the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and was due
one year from issuance. The maturity date has been extended to December 2022. The face amount of the note represents the amount due at
maturity along with accrued interest. The balance of the note payable including accrued interest to Steven Rotman is approximately $1,115,000
and $1,063,000, at December 31, 2021 and 2020, respectively.
During
2021, Steven Rotman advanced the Company funds totaling $398,009. The Company formalized the advances and issued promissory notes to
Steven Rotman. The notes bear interest at an annual rate of five percent (5%) and are due no later than two years from the issuance date.
The face amount of the notes represents the amount due at maturity along with accrued interest. The balance of the notes payable including
accrued interest to Steven Rotman is approximately $415,000 at December 31, 2021.
The
following table summarizes the Rotman Family Nonconvertible Notes:
SCHEDULE OF NOTES PAYABLE
| |
| |
| | |
Carrying Amount | |
| |
| |
Principal | | |
December 31, | | |
December 31, | |
| |
Issue Date | |
Amount | | |
2021 | | |
2020 | |
Steven Rotman 5.00% note due July 2027 | |
07/18/19 | |
$ | 367,500 | | |
$ | 412,672 | | |
$ | 394,297 | |
Steven Rotman 5.00% note due July 2027 | |
07/18/19 | |
$ | 367,500 | | |
$ | 412,672 | | |
$ | 394,297 | |
Bernard Rotman 5.00% note due July 2023 | |
07/18/19 | |
| 140,000 | | |
| 157,208 | | |
| 150,208 | |
Steven Rotman 5.00% note due December 2022 | |
12/22/20 | |
| 1,048,000 | | |
| 1,115,243 | | |
| 1,062,844 | |
Steven Rotman 5.00% note due March 2023 | |
03/31/21 | |
| 395,000 | | |
| 411,652 | | |
| - | |
Steven Rotman 5.00% note due June 2023 | |
06/02/21 | |
| 3,009 | | |
| 3,097 | | |
| - | |
| |
| |
| | | |
| | | |
| | |
| |
| |
$ | 1,953,509 | | |
$ | 2,099,872 | | |
$ | 1,607,349 | |
Approximate
maturities for the succeeding years are as follows:
SCHEDULE OF MATURITIES OF NOTES PAYABLE
| |
| | |
2022 | |
$ | 1,487,000 | |
2023 | |
| 1,105,000 | |
2024 | |
| 226,000 | |
2025 | |
| 36,000 | |
2026 | |
| 38,000 | |
Thereafter | |
| 1,386,401 | |
| |
| | |
Long term debt | |
$ | 4,278,401 | |
NOTE 9 - DERIVATIVE LIABILITIES
As
of December 31, 2021 and 2020 the Company had a $1,778,100 and $1,766,700, respectively, derivative liability balance on the consolidated
balance sheet and recorded a (gain) loss from change in fair value of derivative liabilities of $(53,600) and $238,900 for the years
ended December 31, 2021 and 2020, respectively. The derivative liability activity comes from the convertible notes payable. The Company
analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15
“Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because
the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion
feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance
with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.
The
embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative liability
is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the consolidated statement
of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company
fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.
The
following table summarizes the derivative liabilities included in the consolidated balance sheet at December 31, 2021 and 2020:
Fair
Value of Embedded Derivative Liabilities:
SCHEDULE OF DERIVATIVE LIABILITIES
| |
2021 | | |
2020 | |
| |
| | |
| |
Balance, beginning of the year | |
$ | 1,766,700 | | |
$ | 1,499,800 | |
| |
| | | |
| | |
Initial measurement of liabilities | |
| 65,000 | | |
| 28,000 | |
| |
| | | |
| | |
Change in fair value | |
| (53,600 | ) | |
| 238,900 | |
| |
| | | |
| | |
Balance, end of the year | |
$ | 1,778,100 | | |
$ | 1,766,700 | |
NOTE 10 - STOCKHOLDERS’ DEFICIT
Cumulative
Convertible Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative
Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at
$10 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a conversion
price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price was lowered to $0.05
per common share for those holders who invested an additional $25,000 or more in the Company’s common stock in the aforementioned
September 2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation
preference.
As
of December 31, 2021, the 8,698 shares of outstanding preferred stock had undeclared dividends of approximately $75,000 and could be
converted into 3,230,220 shares of common stock, at the option of the holder.
As
of December 31, 2020, the 13,698 shares of outstanding preferred stock had undeclared dividends of approximately $103,000 and could be
converted into 4,801,840 shares of common stock, at the option of the holder.
Common
Stock and Warrants
During
the year ended December 31, 2021, the Company issued 2,533,334
shares under equity purchase agreements for cash
proceeds received in 2020 totaling $38,000.
The Company issued 78,577,773 shares for services and 11,364,791 shares for settlement of a related party payable. See Note 13 for
related party details. Included in stock subscription payable at December 31, 2021, is $270,000
received under common stock subscription agreements
for 18,000,001
shares during the year ended December 31, 2020.
During
the year ended December 31, 2021, 1,767,945 shares of common stock were issued for the conversion of 5,000 shares of preferred stock.
NOTE
11 - REVENUES
The
following table presents our revenues disaggregated by each major product category and service for the last two years:
SCHEDULE OF REVENUES
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
% of | | |
| | |
% of | |
| |
Net Sales | | |
Net Sales | | |
Net Sales | | |
Net Sales | |
Merchandise: | |
| | | |
| | | |
| | | |
| | |
Case Goods | |
| | | |
| | | |
| | | |
| | |
Bedroom Furniture | |
$ | 2,276,316 | | |
| 8.2 | | |
$ | 2,546,691 | | |
| 12.1 | |
Dining Room Furniture | |
| 1,641,966 | | |
| 5.9 | | |
| 1,639,621 | | |
| 7.8 | |
Occasional | |
| 3,800,158 | | |
| 13.8 | | |
| 3,482,484 | | |
| 16.6 | |
| |
| 7,718,440 | | |
| 27.9 | | |
| 7,668,796 | | |
| 36.5 | |
Upholstery | |
| 10,162,377 | | |
| 36.8 | | |
| 6,458,173 | | |
| 30.8 | |
Mattresses and Toppers | |
| 4,562,374 | | |
| 16.5 | | |
| 3,598,515 | | |
| 17.2 | |
Broadloom, Flooring and Rugs | |
| 2,213,054 | | |
| 8.0 | | |
| 1,447,979 | | |
| 6.9 | |
Warranty | |
| 740,864 | | |
| 2.7 | | |
| 700,193 | | |
| 3.3 | |
Air Purification Units | |
| 1,519,529 | | |
| 5.5 | | |
| 675,354 | | |
| 3.2 | |
Accessories and Other | |
| 731,241 | | |
| 2.6 | | |
| 430,233 | | |
| 2.1 | |
| |
$ | 27,647,879 | | |
| 100.0 | | |
$ | 20,979,243 | | |
| 100.0 | |
NOTE 12 - SHARE-BASED COMPENSATION
Generally
accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common
stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
In
total, the Company recorded $822,070 and $1,031,850 of stock-based compensation for the years ended December 31, 2021 and 2020, respectively,
including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees.
Included in stock subscription payable is accrued stock-based compensation of $873,799 and $2,177,806 at December 31, 2021 and 2020,
respectively.
The
Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:
|
● |
Expected
Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is zero; |
|
● |
Expected
Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility; |
|
● |
Risk-free
Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option;
and |
|
● |
Expected
Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life
of each award, we used the option or warrant’s contractual term as the expected life. |
In
total for the years ending December 31, 2021 and 2020, the Company recorded $15,989 and $21,872, respectively, of share-based compensation
expense related to employee and board members’ stock options. The unrecognized compensation expense as of December 31, 2021 was
$11,070 for non-vested share-based awards to be recognized over a period of approximately one year.
Options
During
2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares
to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to
be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous
practice of granting warrants each quarter to independent Board Members for services. At December 31, 2021, there are 2,251,729 shares
of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which
provides for an additional 5,000,000 shares, which are all available as of December 31, 2021. In 2019, the Board of Directors adopted
an additional stock option plan which provides for an additional 50,000,000 shares, which are all available as of December 31, 2021.
The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to
qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the
fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically
exercisable up to 10 years.
There
were no
options granted during the years ended December
31, 2021 and 2020, respectively.
The
following table summarizes all stock option activity of the Company for the years ended December 31, 2021 and 2020:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
Average | |
| |
| | |
Average | | |
Remaining | |
| |
Number | | |
Exercise | | |
Contractual | |
| |
of Shares | | |
Price | | |
Life (Years) | |
| |
| | |
| | |
| |
Outstanding, December 31, 2019 | |
| 27,983,271 | | |
$ | 0.20 | | |
| 3.45 | |
| |
| | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Forfeited | |
| (108,333 | ) | |
$ | 0.68 | | |
| - | |
| |
| | | |
| | | |
| | |
Outstanding, December 31, 2020 | |
| 27,874,938 | | |
$ | 0.19 | | |
| 2.47 | |
| |
| | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Forfeited | |
| (700,000 | ) | |
$ | 0.57 | | |
| - | |
| |
| | | |
| | | |
| | |
Outstanding, December 31, 2021 | |
| 27,174,938 | | |
$ | 0.19 | | |
| 1.53 | |
| |
| | | |
| | | |
| | |
Exercisable, December 31, 2021 | |
| 26,874,938 | | |
$ | 0.20 | | |
| 1.48 | |
| |
| | | |
| | | |
| | |
Exercisable, December 31, 2020 | |
| 27,124,938 | | |
$ | 0.19 | | |
| 2.59 | |
As
of December 31, 2021 and 2020, there was no aggregate intrinsic value on the Company’s outstanding options. The aggregate intrinsic
value will change based on the fair market value of the Company’s common stock.
Warrants
Warrants
are issued to third parties as payment for services, debt financing compensation and conversion, and in conjunction with the issuance
of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes
option pricing model.
The
following table represents the Company’s warrant activity for the years ended December 31, 2021 and 2020:
SCHEDULE OF WARRANT ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Remaining |
|
|
|
Number |
|
|
Average |
|
|
Average |
|
|
Contractual |
|
|
|
of Shares |
|
|
Fair Value |
|
|
Exercise Price |
|
|
Life (Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019 |
|
|
14,237,646 |
|
|
|
- |
|
|
$ |
0.07 |
|
|
|
3.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(31,734 |
) |
|
|
- |
|
|
$ |
1.29 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2020 |
|
|
14,205,912 |
|
|
|
- |
|
|
$ |
0.08 |
|
|
|
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,031,653 |
) |
|
|
- |
|
|
$ |
0.22 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2021 |
|
|
10,174,259 |
|
|
|
- |
|
|
$ |
0.08 |
|
|
|
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2021 |
|
|
10,174,259 |
|
|
|
- |
|
|
$ |
0.08 |
|
|
|
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2020 |
|
|
14,205,912 |
|
|
|
- |
|
|
$ |
0.08 |
|
|
|
2.53 |
|
NOTE 13 - RELATED PARTY TRANSACTIONS
Officers
and Directors
Per
Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000
per year in cash, $10,417
per month in shares based on a 20-day average
price at a 50%
discount to market, $5,000
per month in cash for expenses, as well as access
to a Company provided vehicle and health and life insurance. During the year ended December 31, 2021, the Company expensed approximately
$422,000
related to this employment agreement and issued
29,205,927 shares of common stock for past services. As of December 31, 2021, the Company had a stock subscription payable balance
of $286,625
or approximately 14,797,000
shares to be issued in the future, $123,155
of reimbursable expenses payable and $116,403
of unpaid salary payable related to this party.
In addition, 6,666,667
shares are owed to this party under a stock subscription
agreement dated in July 2020 for $100,000.
On August 9, 2021, the Company issued 29,205,927
shares to Steven Rotman for past services.
The
Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable
is 10 million shares valued at $291,000, of which 2 million shares valued at $58,200 is included in Steven Rotman’s balance above.
Designcenters.com
This
entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”)
provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered
into a consulting agreement with the related party entity. As of December 31, 2021, the Company had a stock subscription payable balance
of approximately $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.
Blue
Oar Consulting, Inc.
This
entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”)
provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement
with the related party entity.
Per
the consulting agreement, Blue Oar is to be paid $15,000
per month in cash for expenses, and $12,500
per month to be paid in shares based on a 20-day
average at a 50%
discount to market. During the year ended December 31, 2021, the Company expensed approximately $461,000
related to the consulting agreement and issued
30,038,513 shares of common stock for past services. In addition, the Company issued 11,364,791
shares of common stock to settle its accounts
payable balance of $180,000
in February 2021. In connection with the settlement,
a loss of $155,265
was incurred.
As
of December 31, 2021, the Company had a stock subscription payable balance of approximately $281,000 or approximately 15,603,000 shares,
and a balance of $180,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed to this party under
a stock subscription agreement dated in July 2020 for $70,000.
Fluid
Energy Conversion Inc.
In
May of 2019, the Company acquired the assets of Fluid Energy Conversion, Inc. (“FEC”) for 2,500,000 shares of common stock.
FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor, which has
the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable at December 31,
2021 is $103,750 representing the value of the 2,500,000 shares on the purchase date.
NOTE 14 - COMMITMENTS
Employment
and Consulting Agreements
The
Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees,
payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control
of our Company, or by the employee for good reason.
There
is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.
During
the year ended December 31, 2021 and 2020, the Company entered into various service agreements with consultants for financial reporting,
advisory, and compliance services.
Litigation
From
time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business.
Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation
or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future
reporting periods.
EMA
Financial
On
February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged
various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific
performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce
the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion
seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation
of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.
The
Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued a decision
permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together
with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers
as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s
motion dismissing the first and third claims for relief and denied the motion for summary judgment as moot.
The
Company subsequently filed an amended answer with counterclaims. The affirmative defenses if granted collectively preclude the relief
sought. In addition, Vystar filed counterclaims asserting: (a) violation of 10(b)(5) of the Securities and Exchange Act; (b) violation
of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory Judgment Act,
28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying agreements are unconscionable;
(ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the liquidated damages sections; (iii) to
the extent the agreement is enforceable, Vystar in good faith requests the Court to declare the legal fee provisions of the agreements
be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f) attorneys’ fees.
On
June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s
affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court
on July 28, 2020. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court
granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding
Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion
of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals
on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and
the parties are now moving forward with preparing summary judgment motions for their respective claims. Motions should be fully submitted
to the Court by June 2022.
Payment
of Wages Action
On
March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of
himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve
Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant
to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages
Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other sales people
who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5
times the basic minimum wage) for hours they worked on Sundays. The parties settled with the named Plaintiffs, Robert LaChapelle and
certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel
then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement is included in operating expenses
in the accompanying financial statements for the year ended December 31, 2020. On May 21, 2021, one former and one current employee of
Rotmans filed suit in the Worcester District Court on substantially the same allegations as LaChapelle. In January 2022, the parties
settled for a similarly immaterial amount. The Stipulation of Dismissal is expected to be in June 2022 after the settlement payment is
made. The settlement is included in the accompanying financial statements for the year ended December 31, 2021.
Stock
Subscription Payable
At
December 31, 2021 and December 31, 2020, the Company recorded $1,247,549 and $2,589,556, respectively, of stock subscription payable
related to common stock to be issued. The following summarizes the activity of stock subscription payable during the year ended December
31, 2021 and December 31, 2020:
SCHEDULE
OF ACTIVITY OF STOCK SUBSCRIPTION PAYABLE
| |
Amount | | |
Shares | |
| |
| | |
| |
Balance, January 1, 2020 | |
$ | 1,150,125 | | |
| 31,439,401 | |
Additions, net | |
| 1,640,631 | | |
| 71,991,955 | |
Issuances, net | |
| (201,200 | ) | |
| (4,000,000 | ) |
| |
| | | |
| | |
Balance, December 31, 2020 | |
| 2,589,556 | | |
| 99,431,356 | |
Additions, net | |
| 806,082 | | |
| 42,185,365 | |
Issuances, net | |
| (2,148,089 | ) | |
| (81,110,994 | ) |
| |
| | | |
| | |
Balance, December 31, 2021 | |
$ | 1,247,549 | | |
| 60,505,727 | |
NOTE 15 - MAJOR CUSTOMERS AND VENDORS
Major
customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue,
respectively.
During
the year ended December 31, 2021 and 2020 the Company made approximately 14% and 12%, respectively, of its purchases from one major vendor.
The Company owed its major vendor approximately $167,000 and $476,000 at December 31, 2021 and 2020, respectively.
NOTE 16 - INCOME TAXES
The
provision (benefit) for income taxes for the years ended December 31, 2021 and 2020 assumes a 21% effective tax rate for federal income
taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
SCHEDULE OF PROVISION FOR INCOME TAXES
| |
|
|
|
|
|
| |
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Federal statutory income tax rate | |
| (21.0 | )% | |
| (21.0 | )% |
| |
| | | |
| | |
Change in valuation allowance on net operating loss carryforwards | |
| 21.0 | | |
| 21.0 | |
| |
| | | |
| | |
Effective income tax rate | |
| 0.0 | % | |
| 0.0 | % |
Deferred
tax assets as of December 31, 2021 and 2020 are as follows:
SCHEDULE OF DEFERRED TAX ASSETS
| |
2021 | | |
2020 | |
| |
| | |
| |
NOL carryforwards | |
$ | 7,500,000 | | |
$ | 6,715,000 | |
| |
| | | |
| | |
Less valuation allowance | |
| (7,500,000 | ) | |
| (6,715,000 | ) |
| |
| | | |
| | |
Deferred tax assets | |
$ | - | | |
$ | - | |
Deferred
taxes are caused primarily by net operating loss carryforwards. U.S. Tax Legislation enacted in 2017 (the “TCJA”)
has significantly changed certain aspects of U.S. federal income taxation. Net Operating Losses (“NOLs”) generated in 2017
and prior years can be carried forward for 20 years. NOLs generated in 2018 – 2020, as enacted by the CARES Act, can be carried
forward indefinitely. However, NOLs generated in 2021 is also carried forward indefinitely but limited to 80% of taxable income.
For federal income tax purposes, the Company has a net operating loss
carryforward of approximately $35,900,000 as of December 31, 2021, of which approximately $18,400,000 expires beginning in 2024 and $17,500,000
which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately
$18,400,000 and $17,200,000 as of December 31, 2021 in Georgia and Massachusetts, respectively, which expires beginning in 2023.
In
addition, as of December 31, 2021, Rotmans has a net operating loss carryforward of approximately $3,800,000 for federal income
tax purposes of which $1,500,000 expires beginning in 2029 and $2,300,000 can be carried forward indefinitely. Rotmans
has a state operating loss carryforward of approximately $2,800,000 which expires beginning in 2022.
Pursuant
to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income
may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the
future.
NOTE 17 - PROFIT SHARING PLAN
The
Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred
contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.
There
were no Company contributions in 2021 and 2020. Participant and Company contributions are limited to amounts allowed under the Internal
Revenue Code.
The
Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.
NOTE 18 - SUBSEQUENT EVENTS
The
Board voted to create a new class of preferred stock named Class A. The stock will convert 1,000 to 1 into common shares, have a liquidation
preference and earn 10% annual dividends. Class A stock will be available to all debt holders including Board members.
On
January 5, 2022, the Board approved the repurchase of 20,000 shares of common stock at par value.
Blue
Oar has advanced Rotmans $500,000 under a promissory note agreement dated April 28, 2022. The note bears interest at a rate of six percent
(6%) and requires weekly principal payments of $12,500 beginning on May 25, 2022 and continuing until interest is paid in full. Blue
Oar has also advanced the Company funds totaling $40,000. The Company has not formalized an agreement with repayment terms as of this
date.
Steven
Rotman has advanced the Company funds totaling $19,087. The advances bear interest at an annual rate of five percent (5%). The Company
has not formalized an agreement with repayment terms as of this date.
Pursuant
to a settlement agreement with a vendor in May 2022, Steven Rotman personally guaranteed an obligation of the Company totaling $96,681.
Weekly payments of $7,437 began on May 9, 2022 and will continue until August 1, 2022. The Company has not formalized an agreement with
repayment terms as of this date.